A good retirement computer program

Staying Ahead

HOW MUCH do you have to save each month to have enough money to retire? To answer this question, a growing number of people are turning to retirement calculators. You might use a calculator that you find on the Web. Or you might pay a broker or planner to run the numbers for you.

I have bad news. You could miss your target by a mile, even if you invest exactly as you're told. I also have good news. A new Web calculator offers better estimates than you've probably had before.

There are no guarantees. But you should at least test this service -- called Financial Engines (www.financialengines.com) -- against any savings target you're using now. You might find that you're running a greater risk with your future than you thought.

In concept, retirement calculators are pretty simple. You (or your planner) enter your age, salary, pension if you'll have one, and current investments; also, the percentage of salary you're saving, a retirement age and the future income you'd like to have. You're usually supplied with a Social Security estimate.

Then you click a button and, poof, the calculators tell you (1) yes, your plan will work or (2) no, you'll fall short. They reach that conclusion by forecasting what your current investments are likely to earn.

If you'll fall short, you make changes in the plan -- say, a later retirement age or a lower income goal. Eventually, you'll find a mix that the calculator says will work. It's an estimate, of course. But you think it will be close.

Think again. Most calculators give you a single answer -- "save $xxx a month." Or maybe a "best case" and "worst case," so you can pick something in between.

But in real life, there are millions of possibilities. Some investors will earn much more than the calculator forecasts. Others will have to settle for less. What are your chances of landing in the richer group?

Most people think that the best way to improve their odds is to put more money into stocks. Indeed, that's what the typical calculator shows.

But markets sometimes go down or go nowhere for long periods of time (yes, kiddies, it's really true). Stocks raise your odds of doing well. But they also raise your odds of missing your retirement goal, maybe by a mile.

That's what most calculators don't show. You cannot tell how much risk you've taken on.

Enter Financial Engines (FE). It's the brainchild of Nobel Prize-winning economist William Sharpe and, uniquely among Web calculators, gives you a feel for an investment's chance.

Say you have a retirement plan that a standard calculator (or your financial planner) says is going to work. When you enter it into Financial Engines, you might see that its chance of working is, say, 50 percent. Half the time, your mix of investments will succeed; half the time it won't.

Do you want to take that risk? Or would you rather aim for a little more certainty? Financial planner Lynn Hopewell of the Monitor Group in Fairfax, Va., says his clients typically want plans with an 80 percent or 90 percent chance of success.

The math behind FE's calculator is literally too sophisticated for words. Think of it as a racetrack tote board and you're the horse. On the board (the Web site), you'll see the odds that you're going to win. If the odds are poor, you can recast your plan and try again. All this for free.

FE also sells investment advice to people with tax-deferred retirement plans. You pick the level of risk you want (a 50 percent chance of reaching your retirement goal? an 80 percent chance?). Within that limit, FE suggests which of your plan's specific mutual funds to own, and what percentage of your money to allocate to each.

The advice costs $14.95, every three months. It takes into account the company stock you own, as well as other securities held outside your plan.

What if you're using an old-style Web calculator -- one that says, "save $xxx a month?" Its odds of success will depend on whether its assumptions are conservative.

I took a retirement plan that "worked," according to Vanguard's popular free calculator (www.vanguard.com), and put it through Financial Engines. FE reported that, indeed, it had a high probability of success. Other calculators might not test as well. But retirement calculators will get better, fast. They're going to become the People's Plans.